This article originally appeared on December 21, 2018 by the San Francisco Chronicle.
Will a hangover from this year’s initial public offerings haunt big Bay Area companies hoping to premiere on Wall Street in 2019?
The year saw an explosion of stock offerings by tech firms, most of them greeted enthusiastically by investors who drove up their opening prices. But as the market has wildly gyrated in recent months — with a particular brutal plunge last week after disappointing news from the Federal Reserve — many of those tech companies are now trading well below their early highs. Some, such as Dropbox, are “underwater” — below their offering price.
Their erratic performance could overshadow next year’s expected crop of high-profile, big-bucks share sales from the likes of Uber and Lyft. The two San Francisco ride-hailing companies are most closely watched, because Lyft has acknowledged filing confidential papers with the Securities and Exchange Commission as a prelude to going public, and Uber is reported to have done the same.
But it may take more than market jitters to outweigh the enormous enthusiasm that’s expected to greet the largest companies to go public. They’re not just unicorns — the label for private companies worth $1 billion or more — but decacorns, from the Latin prefix for “ten.” Already valued at $10 billion or more by their investors, these well-known names are probably immune to much of the market turmoil, experts say. Smaller companies may fare worse.
With stocks whipsawing, it would be a surprise if young companies were unscathed. The Nasdaq, which is packed with tech companies, is down 19 percent from its 52-week peak.
None of the Bay Area tech companies that went public this year “have fallen flat on their faces,” said Jay Ritter, a finance professor at the University of Florida who studies such offerings. “Today’s market conditions result in stock prices falling” for almost every company.
The recent slump may be a natural force. “A lot of upside was priced into many of these companies,” said Anil Persad, who leads a practice at MorganFranklin Consulting that prepares companies to go public. “So much optimism was priced in that it’s not surprising to see some (recently premiered public companies) in correction or bear territory.”
Investors are less likely to be skittish about household names that go public, which should help Uber, Lyft, Pinterest, Slack and Stripe, for instance. While Slack, a workplace communication tool, and Stripe, a payments service, aren’t consumer brands, their broad adoption by startups will probably stoke insider buzz.
“Brand awareness creates appetite from both the sophisticated community and the broader investment community,” said Barrett Daniels, a partner at Deloitte & Touche who focuses on tech offerings. (He noted he wasn’t referring to specific companies.) “People know their services, use this technology, will be more willing to participate in an IPO. Any time you have that much interest, there’s a good chance the IPO will do well.
“They might not get the big pop they hoped for,” he said, or a dramatic first-day rise that inspires retail investors to pile on. “But even if it’s not an astronomical multiple, it will get done.”
Of course, not getting that big pop — having to accept a lower valuation for their offering price and a more modest run-up once they’re public — would be a disappointment to the investors who’ve poured billions in these companies and are ready for a payday.
Historically, it takes a cataclysmic event on the order of the global banking crisis of 2008 to cause a widespread withdrawal of offerings, said Lise Buyer, a partner in advisory firm Class V Group. “A whole bunch of companies stopped the process during the market meltdown,” she said.
Still, sometimes companies may press pause during the run-up to an offering if the numbers — what investors are willing to pay for shares — don’t come out the way they had hoped, she said.
“But there’s almost always a market for a compelling story at an acceptable valuation,” Buyer said.
She and others cautioned against reading too much into the stock performance of recent Wall Street debutants. “Investors are extremely unforgiving of young companies that miss (estimates of their earnings and profits) in their first three quarters” as public companies, she said. “Their thinking is that that consensus was built with the help of management during the pre-IPO process.”
Jai Das, co-founder and managing director of Palo Alto VC firm Sapphire Ventures, said such judgments of new companies may be premature.
“It’s hard to tell how well a company is doing even a year after it goes public,” he said. One factor: For the first six months, most companies are under lockup, a period when executives, employees and other insiders are barred from selling shares.
A better test, Das said: Wait two years. “That’s when you can really tell if it’s a sustainable company that’s showing growth.”
Sapphire invested in DocuSign, a San Francisco e-signature company that went public in April and is still trading well above both its offering price and its first-day pop, though it’s down from its August peak. “DocuSign has become a verb,” he said. “When that happens, it shows a lot of potential to grow.”
While macroeconomic conditions, including the Federal Reserve’s move Wednesday to raise the target interest rate, helped spur recent volatility, the time of year is also a factor, Das said. Many institutional investors who buy newly issued stocks are hedge funds that are now hustling to sell them to make a good return for their year-end reports.
Smaller unicorns hoping to stampede to market with the decacorns might face a tougher road, though.
“Companies in the $2 billion to $5 billion (valuation) range, which are the ones that make up a large chunk of the market, will have the hardest times going out,” Das said. “Managers will be more cautious about buying them, especially if the market is volatile.”
That in turn may make those companies reluctant to debut. In fact, “if the market remains like this, you’ll see fewer IPOs,” Das said.
Getting ready for an offering can take a solid year of work. Companies are unlikely to throw that away because of current market turmoil, experts said.
“The market today may not correlate to the market in three or six months,” Buyer said. “One month’s bad performance does not impact long-term IPO plans.”
“It’s about revenue,” Daniels said. “Every company thinking of going public has a lot of it and significant growth. That bodes well for the IPO.”
With all the decacorns in play, he remains bullish.
“I still think 2019 will be an exceptional year for IPOs, possibly in historic proportions,” Daniels said.